THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Welcome back for October 2015’s review of where we are the business cycle and how that impacts my Thrift Savings Plan allocation. I will also touch on my views of the markets overall and something you can do right now to improve the TSP. A few of you may have noticed that I didn’t put out an update in September – the August update came out very late and I wanted to get back to the putting them out earlier in the month. This will get me back on track, at least for a little while.
Bottom line up front: my current TSP allocation remains 85% in the TSP S Fund and 15% in the TSP I Fund (this reflects both my contribution allocation as well as where my existing balances are invested). As we will discuss below, at this point I would also be comfortable with just about any percentage of the TSP C Fund mixed in as well.
TSP Allocation Guide’s performance year-to-date: -4.62% (through market close on 10/02/2015)
Year to date Thrift Savings Plan fund performance:
• TSP C Fund: -3.68%
• TSP S Fund: -4.53%
• TSP I Fund: -2.40%
• TSP G Fund: 1.52%
• TSP F Fund: 1.73%
And the TSP LifeCycle Funds are very average for 2015 so far (just as they are engineered to be), ranging from -2.53% to 0.69%.
My view of the markets
It is beginning to feel an awful lot like 2011 again.You may recall that year the US recovery was booming along nicely, but the European financial crisis hit and threw everyone into a panic. That resulted in US markets essentially being flat for the year (the C Fund up 2%, the S Fund down 3%). The recovery did not fall apart, however, and we followed that up in 2012 and 2013 with the S Fund up 18.5% and 38.55% respectively.
In addition to the Asian financial “funk” which has probably been the dominant theme of the past few months (I don’t think we have reached the point where we can call it a crisis), the pace of the US recovery has undeniably slowed. But I don’t believe that the recovery has ended. As a result, I tend to think that the correction and subsequent market volatility are a temporary phenomenon, which is not to say that temporary might not last for four or five months as it did in 2011.
If you are new to the website and are wondering why I’m not hysterical about the market’s recent volatility like the nice folks on CNBC and some of my fellow bloggers, welcome – and take a look at the last update here: TSPAG August Update
September Economic Numbers:
Getting back to my regular format this month, I will run through the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance (these indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle).
First up, the US numbers:
Employment numbers: the September jobs numbers were positive and continued the longest private sector job growth streak in US history, but were well below expecations and underwhelming. I obtain this data from the Bureau of Labor Statistics:
Total nonfarm payroll employment increased by 142,000 in September, and the unemployment rate was unchanged at 5.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care and information, while mining employment fell.
Not awesome, but at this point we are within the range of full employment and really can’t expect huge numbers each month. Instead, economists will look at more nuanced data such as wage growth and number of workers reentering the workforce to try to figure out if things are going in the right direction.
Purchasing Managers’ Index (PMI): as usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates economic growth, and this month’s reading of 50.2 is within that growth range, but just barely. It is worth noting it is the lowest number we have seen in more than a year and it has been trending in the wrong direction:
Economic activity in the manufacturing sector expanded in September for the 33rd consecutive month, and the overall economy grew for the 76th consecutive month.
The September PMI registered 50.2 percent, a decrease of 0.9 percentage point from the August reading of 51.1 percent. Of the 18 manufacturing industries, seven reported growth in September
Yield spreads: I obtain my data for this section from the Cleveland Federal Reserve. This month the Cleveland Fed noted:
Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next September is 3.66 percent, up a bit from August’s at 2.60, and just slightly above July’s 3.05 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.
Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) continues to expand. Note the improved growth rate in the chart over the past two months. I obtain this data from the Federal Reserve:
Money Supply M2 in the United States increased to 12138.50 USD Billion in August from 12059.10 USD Billion in July of 2015.
All of the indicators are pointing in the same direction, although we are not growing at the rate we previously were and several of the indicators bear watching going forward. I believe that we are between the Recovery phase and Growth/Prosperity phase of the Economic Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing, and that the chances of the US economy entering recession anytime soon are very low. For that reason, I remain 85% invested in the TSP S Fund, although because I think we are in the grey area between phases I would be just as comfortable with any mix of the S Fund and C Fund.
The TSP I Fund:
I currently have 15% of my Thrift Savings Plan allocated to the TSP I Fund. You will recall that when we talk about the I Fund, 70% of it is made up of large cap stocks from Japan, the UK, Germany, France and Switzerland:
It isn’t nearly as simple to look at all of the constituent bits of the TSP I Fund as it is to look at the US economy and draw a conclusion as to where they average out to be in their respective economic cycles. But we can try to get a close approximation by looking at the key economic indicators for the big five players in that universe. Note that there is not necessarily as strong a correlation between these indicators and growth in each of these countries as there is in the US, but it is worth discussing them as a point of comparison with where the US economy is. I’m not going to go into detail on each one, but I will include a link to the brilliant Trading Economics country summary pages which is what I rely on for a snapshot. As I look at these, I tend to focus on GDP growth rate, Unemployment, Money Supply Growth, and PMI:
- Japan: Japan indicators summary page
- United Kingdom: UK indicators summary page
- France: France indicators summary page
- Switzerland: Switzerland indicators summary page
- Germany: Germany indicators summary page
And after looking at those numbers and factoring in the stimulus efforts of both the European Central Bank and Japan, I’m comfortable with allocating a portion of my Thrift Savings Plan to the TSP I Fund.
I haven’t even finished this one yet, but it is going on the recommended reading page: Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined, by Lasse Heje Pedersen. This is not a Suze Orman ‘investing-made-simple’ type of book, but neither is it outside the range of individual investors. Pedersen breaks down how investment advisers and hedge fund managers make investment decisions in an attempt to outperform the market. This should not be the first book you read on investing, and there are large sections of it which discuss trading strategies I either don’t have any interest in or access to, but it is a fascinating read if you are interested in how finance, economics and investing come together for some of the world’s most successful money managers.
And one more thing – how you can help improve the TSP:
There is fairly broad consensus out there that the Thrift Savings Plan is a fantastic vehicle for federal civilian and military employees to save for retirement. The TSP’s only significant shortcoming, unfortunately, comes when you reach retirement and actually want to access your money. The TSP is incredibly restrictive in how you are allowed to withdraw your funds. They do this to make things simple and hold their costs down, which is good for us because it keeps our costs down, but they are so restrictive that a lot of people immediately roll their TSP balances into other vehicles which are much more expensive but which they can access more flexibly.
If you haven’t looked at it before, you should review the TSP’s Withdrawing Your TSP Account After Leaving Federal Service.
Please do yourself and all of your fellow future retirees a favor and send a letter to:
Thrift Savings Plan
Director of Participant Operations and Policy
77 K Street NE
Washington, DC 20002
Tell the nice people there that you love the TSP and you want to leave your money there until you die, but unfortunately they have made the withdrawal options so limited that you will be forced to pull your money out and put it into an IRA when you retire.
There are some additional areas of concern for those of you who (1) face mandatory retirement ages and as a result will begin drawing on your TSP prior to turning 59.5 and (2) hold some of your balance in a ROTH TSP. New legislation has resulted in a dilemma – as things currently stand, you cannot draw money only from your traditional TSP – if you take any out, it must come out from both the traditional and ROTH TSP accounts. But because you are younger than 59.5, you are taxed on the Roth, resulting in being taxed twice. The TSP needs to (and I suspect soon will) change their rules to reflect the reality of the new law and allow retirees in that situation to make their withdrawals only from the traditional part of their account.
Dan Jamison of FERS Guide fame (www.fersguide.com) has been leading the fight on this. You can view a copy of his letter here to get some ideas for your own (some of his content really won’t apply to you, but you can certainly cut and paste from other parts).
The Next Update
I will send out a new update next month after all of this month’s data comes in unless I decide to make a change in my allocation or something shocking happens which requires me to send out a new update. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military about once a day at: @TSPallocation
What’s in it for me?
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